Shore Capital reiterates 'buy' rating on Tesco ahead of interim report card
Updated : 13:13
Ahead of supermarket giant Tesco's interim results next month, analysts at Shore Capital Markets took a fresh look at the group on Monday, reiterating their 'buy' rating as a result of a " quantum of considerable solace".
At its successful Capital Markets Day in June, group chief executive Dave Lewis had set out the company's priorities around quantum sales growth, maxing the mix and a focus on costs to drive cash profitability.
In doing so, ShoreCap anticipated that "already robust solvency ratios" were set to further improve, and the visibility and sustainability of the group's dividend should "positively develop", noting the guidance for two-times EPS cover by February 2020.
While the broker said the summer of 2019 was always going to be a challenge for major UK supermarket groups when set against the "almost perfect" trading conditions seen in 2018, it forecast first-half pre-tax profits of £948m, marking a year-on-year growth of just under 30%. For the full year, ShoreCap continued to forecast roughly 12% growth to £2.02bn.
However, ShoreCap did expect the grocer's like-for-like UK sales to be down 1.6% through the second quarter of its 2020 trading year as a result of a "slightly negative impact" from a "more focused and resourceful" Sainsbury's, the attrition of new space openings by German discounters and "a very rational internal approach" to managing its volume/value mix.
ShoreCap did highlight potential benefits stemming from the shuttering of Tesco Direct stores in the UK after the unit lost over £20m in the first half of its prior trading year.
The analysts said: "So, whilst a soggy summer in the UK is expected to have taken the oomph out of Tesco's domestic same-store trade and so share price momentum, we seek to look through the short-term curve to a more rewarding longer-term story.
"Accordingly, we reiterate our 'buy' stance on the group's shares, albeit we cannot deny total uncertainty at the time of writing as to what, if any, waves may ripple for the group's earnings around the UK's exit from the EU. What could possibly go wrong?"